# How Do I Calculate the Cost of Sales?

## Answer

There are two common methods of calculating cost of sales: direct costing and absorption costing. Using the direct costing method, add the cost of material and labour involved in preparing your item for sale. In absorption costing, add the material and labour plus overhead expenses, such as lease, utilities and office expenses.
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How to Calculate the Cost of Sales
An integral part of starting or running a business is knowing the cost of your sales. This information is needed for a basic business plan, to apply for financing and for tax purposes. Tracking the cost of sales is one of the keys to keeping your... More »
Difficulty: Moderate
Source: www.ehow.com
You can calculate the cost of sales using the direct costing method for management reports. In direct costing, add the material and labour involved in preparing your item for sale then figure absorption costing by adding the material and labour plus overhead expenses. This will give you the cost of sales. It’s important to remember that total sales minus cost of sales equals gross profit.
To calculate the cost of sales, you will add the beginning of inventory and all the inventory purchases during the year and then subtract the end of inventory. The beginning of inventory together with the amount of inventory that is purchased equals to the amount of inventory that could have been sold. It is then assumed that the inventory at the end of the period was not sold, hence subtracting the ending inventory balance.
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